Misclassification of workers as independent contractors has been a long-standing issue for employers, and enforcement priority for various federal and state agencies.

On October 13, 2022, the United States Department of Labor (DOL) proposed a new rule that would make it harder to classify a worker as an independent contractor under the federal Fair Labor Standards Act (FLSA). The proposed rule would rescind the more employer-friendly test issued by the DOL in 2021. In proposing this new rule, the DOL stated, “Misclassification is a serious issue that denies workers’ rights and protections under federal labor standards, promotes wage theft, allows certain employers to gain an unfair advantage over law-abiding businesses, and hurts the economy at-large.”

Employers misclassify workers for various reasons. Employers may want to avoid paying certain payroll taxes, prevent the worker from being entitled to employee benefits, or prefer the simplicity of an independent contractor arrangement. And many times, employers are lured into classifying a worker as an independent contractor because that is the worker’s preference.

The determination of whether a worker is truly an independent contractor depends on the facts and circumstances. An agreement by the parties to establish an independent contractor arrangement is not dispositive. The proposed rule would require that the following six non-exhaustive factors be considered in light of the economic reality of the entire work that is to be performed:

1.   The worker’s opportunity for profit or loss based on the worker’s use of managerial skill—an independent contractor can make a profit and experience a financial loss;

2.   Whether the worker makes capital or entrepreneurial investments related to the performance of work, and if so, whether such investment relative to the employer’s investment indicates the worker is an independent business;

3.   Degree of permanence in the work relationship—a worker is likely an employee if the worker’s relationship with the organization is permanent or indefinite;

4.   Nature and degree of control exercised over the performance of work—an independent contractor exercises control over important aspects of the work being performed;

5.   Extent to which the work performed is an integral part of the employer’s business—if the worker’s role is a fundamental element of the business, the worker is likely economically dependent on the employer whereas an independent contractor’s work is unlikely to be vital to the organization; and

6.   Whether a worker uses specialized skills and initiative to perform the work.

The Proposed Rule is unlikely to go into effect until the middle of 2023. In the meantime, employers should closely scrutinize their existing contractor relationships, and exercise caution in classifying workers as independent contractors. The risks of misclassification can be significant including exposure to class action claims, liability for employee injuries, liability for workers’ compensation, back payment of payroll taxes and penalties, benefits lawsuits, and wage and hour claims.

This information is for educational purposes only to provide general information and a general understanding of the law. It does not constitute legal advice and does not establish any attorney-client relationship.